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Executives

Lars Machenil - CFO

Analysts

Lorraine Quoirez - HSBC

Jon Peace - Nomura

Delphine Lee - JPMorgan

Guy Vijay Raja – Barclays Capital

Tarik El Mejjad - BofA Merrill Lynch

Geoff Dawes - Societe Generale

Kinner Lakhani - Citigroup

Nick Davey - UBS

Stefan Stalmann - Autonomous Research

Bruce Hamilton - Morgan Stanley

Alex Koagne - Natixis

Jean-Francois Neuez - Goldman Sachs

Flora Benhakoun - Deutsche Bank

Anke Reingen - RBC Capital Markets

Cyril Meilland - Kepler Cheuvreux

Maxence Le Gouvello - Credit Suisse

Omar Saad - Jefferies

BNP Paribas SA ADR (OTC:BNPZY) Q2 2014 Earnings Conference Call July 31, 2014 8:00 AM ET

Operator

Good afternoon, ladies and gentlemen. And welcome to the Presentation of BNP Paribas’ Second Quarter 2014 Results. For your information this conference is being recorded, supporting slides are available on BNP Paribas IR Web site, www.invest.bnpparibas.com. (Operator Instructions) I would like now to hand over to Lars Machenil, Chief Financial Officer. Please go ahead, sir.

Lars Machenil

Thank you very much. And so that would be me. Good afternoon fine ladies, gentlemen and welcome to our second quarter results presentation. In our usual way, I would like to take some 15 minutes or so to go through the main slides and then basically hand it over to you for Q&A as we do. So if I can ask you to start with Slide 3 where as anticipated in our second quarter accounts we have booked one-off costs deriving from the comprehensive settlement with the U.S. authorities.

The total impact on the second quarter was €5.95 billion which comprises 5.75 billion of penalties, so this is the overall penalty net of the provision we had already made and €200 million related to the remediation plans, so the remediation plan which part of the elements that we agreed upon with the U.S. authorities. So as a result, the second quarter closed with a net loss of €4.3 billion. If we exclude the impact I’ve just mentioned and the typical other non-recurrent items that I shall detail in a moment, net income of sort of bottom-line stood at a very good €1.9 billion in the second quarter.

In particular, the revenues of the operating divisions at constant scope and exchange rate and net of these exceptional were 4% higher. On the back of stability of retail revenues this quarter, good progress in investment solutions and a very strong performance of advisory and capital markets. Also so the Group gross operating income was over 6% better than the previous year the Group cost of risk decreased this quarter and basically stands this quarter at 53 basis points over outstandings.

Finally in terms of solvency, our fully loaded Basel III ratio was in line with our planned objective at 10% and while our immediately available reserve of liquidity stood at €244 billion. At the same time, we continue to see a sustained pace of growth in our retail deposits which increased by 4.5% again at constant scope and exchange rates.

So having said that, if you could flick to Slide 5, and where we have recapped the main impact from the supplement with the U.S. authorities and the remediation plan that we have put in place and agreed upon with those U.S. authorities. This I remind you involved implementation of two specific measures that is, first, the creation with our group compliance of a group financial securities department in the U.S., so basically in New York which will be headquartered over there and will ensure global compliance with U.S. regulations related to those international sanctions. And secondly, related to that of course, the centralization of processing and control of all group’s U.S. dollar flows through our New York branch. So those two activities will basically be adjacent and they will be New York based.

And as I said in the second quarter, we have booked not only balance of the settlement costs, that is a 5.75 but also provided for the remediation plan costs to come which are €200 million as I referred to earlier. And all-in-all, the impact on our common equity tier 1 of this is 100 basis points.

In addition to the remediation plan and this is important and in order to avoid any repeat of this situation which we said we regret and we’ve put everything in place now for this not to reoccur and so we are announcing a comprehensive plan to strengthen our internal control and procedures as you can see by advancing to Slide 6. The organizational, the supervisory and control functions will be aligned to the model of the risk department and the general inspection which is basically in my mind the best practice standards within the Group. Compliance and legal will be vertically integrated in order to ensure their independence and enhance their effectiveness.

Over and above, we will set up a group supervision and control committee which will be chaired directly by our CEO and which we will meet frequently and which will be charged with overseeing the consistency and coordination of supervisory and control actions taken. We will also set up a group conduct committee to oversee our policy regarding specific sectors of activity and sensitive countries. This committee will also include qualified members from outside the Group. And to do all this we are in the process of selecting an independent international consultant to assist us with the whole process.

Now if you turn to Slide 7, you can see that we intend to further strengthen the resource we allocated to compliance but as a reminder, you see that the staffing of this function has already increased by over 40% since 2009 and in parallel to this there will also be work on improving internal tools, training and the likes, but also to reinforce mandatory periodic procedures of client portfolios and know your customer kind of charges. And to talk it off, we will also strengthen the controls performed by our general inspections in these [indiscernible]. So all-in-all, as you can see, we are strengthening and this through a combination of governance evolution, strengthening of existing procedures and the likes.

Now having said that, and I would like you to turn your gaze to Slide 8 and come back to the second quarter results kindly ladies and gentlemen and in particular on the exceptional, the quarter’s exceptional items. And so beyond the U.S. settlements really that impacts, I would point out this quarter the impact of the first time adoption of the FVA so that’s the funding value adjustment, which as you know, deals with liquidity costs for non-collateralized derivatives. In addition to that, you can see the negative evolutions impacting the OCA and the DVA and also the transformation costs related to our simple and efficient plan. And so globally, the net impact of the one of this quarter stood at 6.2 billion as versus well a positive 200 in the quarter a year ago.

As I mentioned before, you can see now by leaping over to Slide 10, that the revenues of the operating divisions progressed essentially on the back of a good performance of our investment solution businesses and a strong performance of our CIB, in particular capital markets.

Now flicking to the following Slide 11, you will see that costs progressed at a lesser pace than the revenues in the three divisions. Cost reduction in our domestic markets was confirmed and we continue of course to implement our simple and efficient plant more on this if you will now turn the next slide which is Slide 12, where we provide the latest update on this Simple and Efficient initiative.

As you can see, over 2,400 projects are already up and running and we booked an addition 223 million recurrent cost savings in the second quarter. This brings the cumulative total to that over to €1.2 billion. In parallel of course we incurred this quarter some 200 million of transformation costs. I remind you that we expect some 770 million for the whole year 2014 and so all-in-all, Simple and Efficient is generating the recurrent cost savings according to plan.

Having said that, if we now look at other important element of the bank and we shift our attention to the cost of risk. I would kindly ask you turn to three slides detailed slides on the topic which start at Slide 13. As I said, that cost of risk was lower and stood at 53 basis points this quarter. And this despite the fact that BNL’s cost of risk continued to weigh, although it’s stabilized versus the previous quarter. All the other businesses either remained at the low level or improved. If I look at them one-on-one, corporate banking clocked in at low cost of risk this quarter. Cost of risk in France remained low, while in Belgium it was particularly low. As I said BNL I talked about. Europe-Med and Personal Finance showed a decline in the cost of risk this quarter, while in North America BancWest remained at a very low level.

Having said all that and well I would say as last but certainly not least. If you proceed to Slide 16, I will be glad to update you on our financial structure. If we start with solvency, fully loaded Basel III common equity tier 1 ratio was 60 points lower and clocked in at 10.0%. This was due to the costs related to the comprehensive settlement with U.S. authorities which as I said earlier, costs 100 basis points. On the plus side however, the Q2 results net of these above costs, contributed 30 basis points based of course amongst others on the assumption of a dividend payment equal to €1.5 on an annual basis. Furthermore, the reevaluation of the available for sale portfolio added a further 10 basis points in the quarter.

Moving to Basel III leverage ratio, our fully loaded ratio was at 3.5%, well clear of the 3% minimum requirement. Looking at liquidity, our immediately available reserves stood at €244 billion in line with the year end 2013 situation. And finally, you might want to note in particularly the debt investors amongst you that where they have already completed our medium and long-term funding program for the year 2014.

Now having said all that, if you would still stick with me for a couple of moments and I would kindly ask you to glance at the divisional results and let’s start with the domestic markets and which starts on Slide 18. As you can see, the low growth environment in Europe continued to weigh on lending activity while deposit gathering retained a strong pace especially in France, Belgium and Cortal Consors in Germany that is, overall deposits were up 3.8% versus the previous year at €296 billion.

We continued to develop our cash management where we’ve been quite successful in the wake of the transition to the step up standards and similarly we have pressed on with digital innovation in areas with the lovely names such as e-wallets, mobile payment solutions and also the continued development of our Hello Bank! Revenues were slightly higher at 3.9 billion with a good performance of our private banking and ROL despite the impact deriving from the persistently low rate environment at 0.6% in operating cost mend also in Q2 we saw an improvement in the cost income of our main markets.

Gross operating income mark a 3% increase while pretax income stood at 0.9 billion, slightly below last year due to the high cost of risk in Italy. Overall, I would qualify this as a good performance with a particularly strong show for our Belgium retail this quarter. Still on retail if you advance whatever kind of medium you use to look at those slides to the one on Page 22, and in our Europe-Meds volume grew to remains sustained as you can see both in terms of loans and deposits. I remind you that we are looking at comparisons at constant scope and exchange rates due to some significant ForEx fluctuations over the period.

In our Europe-Med geographies we continued to develop our cash management capabilities as well as our private banking. Activity in Turkey remains strong in terms of volumes and the private banking assets under management further increased to 3.5 billion at the end of June. In Eastern Europe we continue to closely monitor the unfolding of events in Ukraine. And with all that revenues were up 2.7% despite the impact of regulatory changes in Algeria and Turkey which have come into force as I said last year in the third quarter of 2013. Net of this effect, revenues would have progressed by close to 10% and with growth in all the different geographies.

The operating costs were 6.7% higher mostly on the back of the continued strengthening of TEB commercials, so tax commercial setup in Turkey and Europe net cost of risk as I said was lower this quarter and pre-tax income came to €190 million, as slightly lower than last year on the back of all that.

Leaping now to another ocean, the Pacific one, let’s go to Slide 23 and look at BancWest, which had volume growth which remained strong in the second quarter reflecting the good marketing drive. Private banking also continued to do well proof being the continued increase of its managed assets, which at the end of June were just shy of $8 billion, so with all that, revenues improved by 1.2%, thanks to those higher volumes and despite the persistence of what I would call an unfavorable level of interest rates.

If we look at the other element which is then operating costs and they were as I have been saying for a couple of quarters now penalized by higher regulatory expenses, I am in particular thinking of the CCAR related ones and the impact also -- so the cost of this also impacted from the strengthening of the commercial setup which we have discussed which are part of the plan and which are partially offset by savings resulted from network rationalization. So overall, BancWest pre-tax income was 6% lower and so we basically came in at €178 million.

If I conclude the review of the retail part of the Group by asking you kindly to switch to Slide 24, where personal finance remains very dynamic as depicted by two recent events I am of course referring on one hand to the purchase of the remaining 50% of LaSer from Galeries Lafayette, which de facto makes personal finance the number one specialized player in France.

And secondly I also refer to the renewal of the strategic partnership with Commerzbank in Germany until -- which runs until 2020 and that is in Commerz Finanz in which the bank holds a 50.1% stake. So basically on the back of this consumer finance is outstandings progressed by 3.6% over the period on a comparable basis with an increase in all regions but I would particularly highlight the Germany, Belgium and Central Europe. With all this, revenues increased by 1.4% excluding non-recurring items while costs were up 1.5%. The combination of this and a lower cost of risk and also good contribution from associated companies led to an 18% improvement in the pre-tax income at constant scope and exchange rates.

So two more to go and so if you could have the energy to cast your eyes on Slide 26, which shows how the different businesses of our investment solutions evolved in Q2. Again at constant scope and exchange rates, revenues were 5% higher, with a positive contribution from all its main businesses and particularly I would stress however, insurance and security services. Operating costs were up due to the higher level of activity in insurance and security services in conjunction with the ongoing implementation of the development plan and in various business areas and geographies.

In this respect, this quarter was particularly significant for security services which achieved a significant commercial success with for example the 180 billion pan-European mandate from Generali Group and the acquisition of the depositary activity of Banco Popular in Spain and where it’s on 13 billion of assets. So we are very pleased with that and so the second quarter pre-tax income top €600 million marking a 9.2% increase on the previous years. So wrapping it up, investment solutions or wrapping investment solutions at least, it delivered a good overall performances, and as I said, particularly noteworthy insurance and security services.

Now if you could now basically go to the Slides 28 and 29 on our corporate and investment banking, which posted a good overall performance this quarter. If I start with advisory and capital markets, revenue showed a strong 22% increase excluding FVA impact, the first time introduction FVA as I mentioned before. Fixed income saw a strong revenue performance with a 22% improvement net of that introduction, so it’s basically the 22% of advisory and capital markets stems from its two engines, so 22 at fixed income where interest rates and credit showed good levels of activity in Q2 and also ForEx was up this quarter with a good performance in Asia but also the primary activity was quite good this quarter and confirmed -- so the Bank confirmed its number one spot for corporate bonds in Europe.

And as I said, the other engine, which is equity and advisory, has also remained strong and increased also with 22% versus last year and we saw good client demand for equity derivatives both in terms of flow and of structured products, so this bodes well going forward. And also in Q2 as we said, we noted a rise in M&A and equity capital market activities and reconfirmed our leading position on equity linked in the EMEA region.

If we take the last slide on the businesses and which is 29 on corporate banking, loan balances over there remained globally stable compared to the previous quarter and in the first semester, we confirmed our number one spot for syndicated loans in Europe while continuing to develop our cash management. Now you see the common thread to this. This also contributed to a 16% increase of our deposit base which reached €73 billion.

On the back of this, revenues increased by close to 3% with strong growth in Asia which continued throughout Q2. Revenues also improving in the Americas which remains I cannot stress it enough, a key element of our strategy. In Europe, activity remains soft given the weak economic environment and the slowdown in the energy and commodity sector. So all-in-all, we reaped some initial benefits from the business development plans we’ve been implementing amongst others as I highlighted in Asia and in cash management.

So with that, Slide 30, the last one which concludes my introductory remarks to our second quarter results, which I would if synthesize it and I will synthesize it as follows, as basically results were very significantly impacted by one-off items this quarter. We are pursuing major changes to the Group’s internal control systems, our operating divisions performed well. Net income, net of those exceptions, stood at €1.9 billion and our balance sheet remains rock solid.

So ladies, gentlemen, thank you very much for your attention, it will now be my pleasure to take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We have a question from Lorraine Quoirez from HSBC. Please go ahead.

Lorraine Quoirez - HSBC

Last in addition to the one-off costs, could you possibly quantify the recurring cost associated to the new setup of compliance team and processes? And other questions would be on the cost of risk. Would you basically foresee an improvement in Italy from H2 or do you think this will come a bit later. And finally, I’ve seen one of your comments saying that BNP wouldn’t raise any convertible capital. As you know, most of European peers had a total capital ratio north of 15% and this compares to you with 12%. So I just would like to know what gives you confidence that you can run at this level? Thank you.

Lars Machenil

Lorraine, thank you for your questions and with respect to your question on the cost for compliance, so as I said, with respect to the what we call the remediation which are basically the steps taken in agreement with the U.S. authorities we have basically booked an upfront provision for the cost to come to install it of 200 million. But with respect and I take that as your question. With respect to all the steps that we take beyond that, and so we are in the process of detailing it, so this will basically be a set of governance changes which might not necessarily be very expensive but it will also be additional staff, it might be adaptations, evolutions to systems. And so we are in the process of basically reviewing this, we are in the process of getting some external help on that. And so it is tad too early to identify and one of course should not assume that this cost will be zero. I think and we will qualify them when we can but I think it could be something in the order of like 100 million once this is full to speed to maybe 150 something which is not impossible.

And I will remind you that within a multiyear plan there are always of course some overs and unders, so this is of course let’s say some unders, there might be some overs like evolutions on inflation and the likes. But it is just a tad too early to crystallize it out, the moment we are ready we will come back to you on this one.

With respect to your question on cost of risk in Italy also here it’s probably a tad too early and you have seen that the cost of risk has stabilized and I think we will have to wait how the summer unfolds or in particularly, how September will basically go and if we will see that steps which are being announced will basically materialize which could basically have positive effect on the economy. I would remain prudent at this stage we basically said Fabio our CEO in Italy basically said that 2014 would be a difficult year. I would at this stage stick to this and remain prudent.

With respect to your third question on the regulatory environment, so as you know for us what is a key yardstick is of course the fully loaded core equity Tier 1 where we deemed that the 10% yardstick where we put ourselves is where we need to be. And I do observed like you do that some smaller less diversified banks go for gold plating, so basically they put themselves at higher than what basically the regulator demands. We, given our, and I think proven track-record and diversification and stability and we do not believe that we have to gold plate.

One also see that some regulatory environments which are typically more in smaller countries maybe more systemic ones, are also going into a trend of asking for some gold plating versus what is basically in Basel. And so far the regulatory environment in the Eurozone hasn’t been asking for any of that gold plating. So with that and we feel that the yardsticks we have are very appropriate for a diversified bank such as BNP Paribas.

Operator

Thank you. We have a next question from Jon Peace from Nomura. Please go ahead.

Jon Peace - Nomura

Hi, two quick questions please. And the first one is with regard to your revenue performance in trading and in financing which was very strong this year. How sustainable do you see that run rate so were there any one-offs in the revenues? And the second question is, would you just be able to sort of reconfirm to us your capital planning plan from here on outwards in terms of the amount you intend to set aside for the dividends, for RWA growth and then any sort of excess capital you generate on top of that? Thank you.

Lars Machenil

Jon, thank you for your questions and with respect to the capital market activities, I remind you the following; so, first of all that BNP Paribas has basically deleveraged itself already in 2012 in order to not be hampered or by any of these kinds of legacy assets. So, that basically allowed us in our industrial plan to basically take up the capital markets as a core element which in spite all of the overall development and the desire of Europe to have that capital markets play a more prominent role in the overall financing of the economy. And so we basically position our capital markets in there, so there is no leveraging or deleveraging which is ongoing which basically chuckles us that’s the first thing.

The second thing is that we have of course been organizing ourselves as I said towards what the desire is of the European parliament with respect to that capital market evolutions. And I think a good bellwether for this is our equity and advisory business and which is on the Zandagort on our side on these kinds of activities. They have been adapting and evolving swiftly you can see that in the results moreover that has allowed them to somewhat consolidate activities as is part of our plan. You will see that we basically take around some of the activities of RBS. These things are basically still marginal in this quarter but will come up to steam in the next quarters and basically the objective on fixed income is also its strategy and similar to that one.

So that is basically how we provide color to the trading and the financing. And so indeed and the results if I look for example at fixed income they are the traditional run of the mill activities I will remind you that they are somewhat flattered in their overall evolution by the fact that Q2 of last year was at that lower end particularly in rates but that is basically it’s on that activity.

With respect to your second question on capital planning, so we’ve guided that this year we would keep our dividend at the same level as we had last year which is €1.5 a share for the year and our intention of course is as of next year to resume with what we had positioned in our industrial plan which basically is distribution of retaining earnings in order to profit growth and basically dividend and as per our guidance of reaching of 45% payout. So for us this is the year where we qualify the dividend and then we should be back to what we said in the industrial plan.

Jon Peace - Nomura

Great, thank you.

Operator

Thank you. We have a next question from Delphine Lee from JPMorgan. Please go ahead.

Delphine Lee - JPMorgan

A few questions on my side first of all just on the corporate center revenues if Lars just confirm that your guidance for the full year is still 300 million I mean it looks like this quarter the results are much better. And also on the cost side if you take out the 200 million or so for simply efficient but you also have some one-off costs related to remediation. So if you exclude that it looks like the cost base is relatively low compared to previous quarters, which is a bit surprising.

Secondly just to come back on the cost of risk so I understand sp BNL it’s going to be a little bit difficult. But I mean would you still expect something around less than 100 basis points in ’16 and compared to what you had said at the Investor Day on your guidance of cost of risk being flat in ’16 versus ’13. Any deviation from that in some businesses or what should we expect in terms of the past in the next few years and then last question is on just on litigation. I mean now that you’ve settled with the U.S. on OFAC I mean do you feel comfortable with the litigation reserves that you have in your balance sheet and any other risk you want to highlight or comment on I don’t know the FX build or any risk here to increasing operation related risk? Thank you.

Lars Machenil

And with respect to corporate center thank you for allowing me to re-clarify. I will do the cost first because these are simpler to respond. So, following the restatement we did earlier this year where we basically guided towards a cost on a yearly basis of around 550 million. And if you look at our quarterly result and you take out the exceptions you will basically see that bar 1 million we are on that run rate. So there is nothing spectacular. With respect to the top-line I’ve guided that in a normal year the charge would be to a negative element in the revenues of 300 million on a yearly basis.

I’ve also guided that and this is basically on the back of some additional liquidity costs which are in corporate center. And what I basically said is that there might be quarters where there might be more positive elements and there might also be quarters where there are less positive elements. This quarter as is typically for the second quarter you have dividends from the participations which are basically lifting the results. There is also private equity which has been particularly contributing this quarter but in other quarters might not and so on and so forth.

So my prudent guidance remains that on a yearly basis, it remains at that minus 300, but at the same time of course the positive elements that we have seen now they will not go away. So that means that my conservative guidance for the two quarters to come would be for each quarter a 75 million charge for each of them. But again, there are some volatile elements in it, so it can be a bit better, it can be a bit worse. So from a conservative prudent point of view, and that is how I would guide on this.

With respect to your question on BNL, so indeed we said that the evolution and the orientation that we have in our plan to reach a 15% room in 2016 is stemming from a set of elements, it is stemming from commercial evolution, it’s stemming from operational evolutions but it is also stemming from economy somewhat returning to a more normal kind of level.

And so we’ve taken a central scenario in which we indeed had our cost of rate going below 100 basis points in 2016. Now depending on how that macroeconomic scenario enfolds. And well, maybe we will the thing might be a little bit delayed or might be a little bit earlier. So we do believe in the trend but it is of course somewhat correlated to the overall evolution of the economy and therefore the speed at which we can install our new strategic directions. So that is on BNL.

With respect to litigations, and so the litigations that we know of and that are articulated and that we can basically estimate they are reserved in the balance sheet and that’s basically it for the rest you have on the last pages of the financial statements, you have the contingent liabilities for which there is at this stage no possibility for the bank to have an estimate. So that is of a different nature.

With respect to your question on operational risk, we of course in our advance model, we update the parameters and just like we do for all the elements of the risk-weighted assets. And so of course the updating of the recent events in that has increased our risk-weighted assets related to operational risk in this quarter by €2 billion.

Operator

Thank you. Our next question is from Guy Vijay Raja from Barclays. Please go ahead.

Guy Vijay Raja - Barclays Capital

Just a couple of questions, firstly on some of those retail divisions that posted negative jaws, so Europe-Med, BancWest, Personal Finance. So what’s your outlook there in terms of getting back to positive jaws. You seem to be flagging some special items in there, so are they going to allow this back into sort of positive jaws for the rest of this year. And just second question on the corporate deposits you’ve got 16% growth. I wonder if you could just break that out between U.S., Asia and Europe, please?

Lars Machenil

With respect to the entities you mentioned in the retail, I think let’s start first with emerging markets and Personal Finance. So if you remember at the Investor Day, we had an overview slide by saying basically BNP Paribas if you wish is dancing to two different beats, it’s dancing to the beats on one hand of the Eurozone and then of some areas of growth. And of course in those areas of growth, we said that we would have to do some direct cost investments in order to capitalize on the skills and the relations we have in order to capture that growth.

And so Europe-Mediterranean and Personal Finance are clearly in that situation. So in the end, we’ve announced that in order to grab part of the growth in Turkey we have to basically increase our commercial setup over there, which is what we are doing. And with PF, it is basically the same. So these elements are let’s say, are on the back of that. But then there are of course some specifics which impact. For example in emerging markets you would have had the appropriate jaws, whereas not that in two of those countries, mainly Turkey, not mainly, namely Turkey and in Algeria the regulation changed with respect to some of the fees which basically have lowered in one shot the basis and so basically leads visually to jaws which are negative. But as we have mentioned if you would look through those, the jaws would be positive, so over term of course those jaws will return into positive territory.

Then you have BWe, with respect to BWe we are of course on hand faced probably at the same story. We are investing and we told you that story and for example BWe is similar to, to for as BWe didn’t had the natural market share in some key products but they didn’t necessarily have that in other products just like personal finance, wealth management and so forth. So we basically bought the distribution skills the product skills of BNP Paribas and basically invest in it, so that BV can also take on those products its natural market share. So these things basically come at a cost and although part of these costs are mitigated by Simple & Efficient and by readapting the branch network.

However, as you know BWe has to be ready, has now been added on the list of CCAR and basically has to do the relevant and appropriate investments to pass this CCAR event. So that is something which weighs on BWe. So all-in-all three of those entities which are basically investing and they will have over the period of the plan their positive jaws with this one little proviso on BWe with respect to the relevant and important regulatory investments that are going on. And for the rest, with respect to the corporate deposits, basically in our reporting we report that as one sliver and we do not break that down into the region.

Operator

Thank you. Our next question is from Derrick from Bank of America Merrill Lynch. Please go ahead.

Tarik El Mejjad - BofA Merrill Lynch

Hi, good afternoon. Just a couple of quick questions, first of all on your CIB performance and particularly on the corporate banking. Can you highlight if this trend is sustainable and if there is any seasonality in that quarter? And also another question on the leverage, can you shed some light to what is basically the you BCBS exposure relative to CIB exposure for the leverage? Thank you very much.

Lars Machenil

Thank you Tarik and so with respect to corporate banking and as we said on corporate banking is also running two different beats. On one hand, we have Asia where our development plan, it was actually the first element of our development plan, so that is well underway and we had a good growth in that area also of course on the back of how the economy is evolving.

In North America there has also been a good evolution in the back of the economic environment and then there is Europe and Europe is more, middle of the road in the sense that the economy of course is more hesitant and also somewhat the energy and commodity is somewhat weighing on that performance. So, I would say all being equal, I think this basically indicates that the bank is progressing on a development plan but of course for the rest it will depend on how the economy and all the other elements evolve but I think that the corporate banking plan is well engaged.

And with respect to the leverage, so if you look at the leverage, so we were at the end of the first quarter, so this is all the numbers we published are the ones of the CRR and so the ones that they were voted by the European parliament. So, we stood at the end of last quarter, so Q1, we stood at 3.7, so the overall balance sheet used in that calculation between Q1 and Q2 has basically not changed. It’s basically the capital which has reduced given well the impact on the capital and that basically leads to a 20 basis points drop from 3.7 to 3.5. As we said, well I mean I have lost track of being able to publish every indicator in every different form, and so the moment BCBS do 70, we will be in swing we will report it on it. But if we look at it the figures should be roughly in the same orders for us as are the ones as described in the CRR.

Tarik El Mejjad - BofA Merrill Lynch

Okay. Just one follow up question on the potential issuance of AT1s do you have any time frame an indication you can give us?

Lars Machenil

As I said earlier for us today I am in a situation where I’d correct the TTA1 I am where I want to be I am not in the business of stacking up capital and the AT1s I have today are grandfathered and so I am not in a rush to have two layers of additional tier one so our stance on this one is unchanged.

Tarik El Mejjad - BofA Merrill Lynch

Okay, thank you very much.

Operator

Thank you. Our next question is from Geoff Dawes from Societe Generale. Please go ahead.

Geoff Dawes - Societe Generale

Geoff Dawes from Societe Generale and I’ve got a couple of questions hopefully quite brief. The first one is very brief on the private equity gains in the corporate center and the equity investment portfolio gains, could you give us any clarity on the amount essentially is that enough to offset the €350 million out of negative revenue items that you have. So that’s the first question on private equity gains, the second question is on Belgian retail banking. The cost line has remained quite stubborn in that division despite it being one of the areas that you talk about having the most potential to cut costs and certainly relative to your peers it does run quite a high cost base. Is there anything more that can be done there or when should we start to see some more material improvement from that kind of €585 million to €590 million level? And the third question is kind of quick one obviously the DACP have announced the TLTRO. What is you stance on that? First of all, do you intend to take some and second of all do you think it can actually be used to lend the SME in corporate sector and in terms of your own books? Thank you very much.

Lars Machenil

Thanks. Geoff thanks for your three questions. As I said with respect to the elements of corporate center we do not explicitly breakdown our private equity portfolio. So I will not be able to give this number to you. With respect to Belgian retail I am not sure I fully understood your question. But if I look at the Belgian retail and what I observed on one hand is that the volumes are up. I noticed that on the back of that and the fact that in Belgium the deposits are non-regulated so re-pricing is something which is of the possibilities in the hand of management so basically that leads to revenues which in this quarter are up 2.1%.

If I look at the operating expenses which I think your question was about, the operating expenses basically improved so they improved by 1%. And I remind you and this is to I mean with all kudos to the Belgium management this is basically minus 1 after they have basically they are facing an increase of systematic taxes levied by the Belgium government. So, I think what they are doing is in full swing which is the bank of the future. They’re doing that. So I think all this basically leads to a cost income improvement of 1.7 which I think is the guys in Belgium are doing a good job.

And with respect to your third question on the TLTRO so as a reminder let’s be clear I mean we as bank of the Eurozone we don’t want anything else than that the Eurozone economy gets rid of shackles right. There are many things that can help unshackling this. But still today a big chunk two-thirds of financing which probably has to our company this unshackling of growth is and will remain provided in the near future by the banks. So in order for this to happen there is several things which are useful as I said in previous calls what is happening with the ECB and taking over supervisory over side is probably one step of what the doctor needed the fact that the TLTRO is oriented into stimulating that economy. So we as a bank with a European footprint and we will participate in this initiative. But it is too early to say what the specifics of that will be we’ll come back on that later.

Geoff Dawes - Societe Generale

Okay, but it is funding that you are inclined to accept so inclined to direct to the corporate sector?

Lars Machenil

Yes.

Operator

Thank you. Our next question is from Kinner Lakhani from Citigroup. Please go ahead.

Kinner Lakhani - Citigroup

Yes, hi good afternoon. So firstly I wanted to ask you on corporate banking Slide 29. Particularly you referenced to slowdown in energy and commodities. Just wanted to get some more color from your what -- to what extent that’s a function of the sanctions coming onboard, to what extent, on the other hand it’s proactive rightsizing this business in which clearly you had a very strong dominant position. And also related to that, if you could provide us an update on the plans to manage the ban on clearing, which I think is starts from the beginning of next year?

Secondly on equities, if you could give us any guidance on how to think about the on-streaming of the RBS equity derivatives business which I guess will come in from Q3 onwards? And final question at the Group level, how you are thinking about the GLAC and MREL potential requirements and how you think you are positioned for that as those requirements come in? Thank you.

Lars Machenil

Kinner, thank you very much for your questions and with respect to corporate banking and E&C, this is a trend which basically has been ongoing for a while. If you look back at the same comment we made it in Q1 and it’s more something in our mind which is a bit an overall reflection of what is ongoing in that sector. So it is not something specifically that you should tie now into the announcement of what we have done. It is something that we basically observed already in the last couple of quarters.

Nevertheless, with respect to that and on your second question on the remediation so I remind you that the remediation so as I said, this is what we agreed upon with the U.S. authorities and this involves several steps as I said. It involves basically having in the end all clearing done by BNP Paribas New York having also the financial security done. There is a whole set of things and we basically discussed with the U.S. authority that this is relatively a tall order, there is a lot of things to do. And so we negotiated sufficient time to basically implement that. So these things are all underway. They of course, they take time to get through all this complex matter. I remind you that and amongst others for that reason there is of course, there is after 90 days so end of September there will be a follow-up on where we will report progress on that remediation to both the U.S. and the French authorities. So these things are ongoing and as I said they are involving many aspects and we are progressing on those.

And with respect to you question on equity. So indeed and we are very pleased that we have been able to do this bolt-on with respect to RBS side, it’s another illustration of what -- when we talk about bolt-ons on what we want to do because it’s, I think it’s also attribute to the skills of the bankers and at the same time it provides access to other clients. And indeed the impact on this quarter is marginal it will step up in the next quarters. But we haven’t specifically guided on the outcome of it, so I would say, I hope to hear you back on the end of October to shed more light on that.

With respect to your last question on the MREL, so if you look what is crystallizing in the European legislation, there is a whole slew of elements which are being set up and one of them is basically saying that there has to be and we basically are there to that entire year that you have to have a broad set of instruments that can be basically build in. And that there has to be -- that is basically the idea behind the MREL, there has to be a certain percentage of your balance sheet of this kind of broadly instruments that can be built in. And so for us, given the structure of our balance sheet and that MREL kind of introduction should be manageable. And as I said for us, this is in the light of the overall respect of the higher key between instruments as you typically have it, so that’s basically where we stand on that.

Operator

Thank you. We have your next question from Nick Davey from UBS. Please go ahead.

Nick Davey - UBS

Yes, good afternoon everyone. Three questions please, the first one on French retail banking revenues which you have commented were pretty sluggish in the first half. I just wondered if you felt there was any room for more optimism in the second half, specifically any comments you might have around deposit pricing given the listed out rate cuts. And also I just observed your volume numbers that the SME volumes have picked up Q-on-Q, I wondered if you had seen anything which gives you room for optimism that that might be a sustainable trend or a less negative trend than you have seen in the past?

And second question please on BNL where you have talked in this presentation around the strategy you have got around costly deposits and shrinking deposits to help the revenue base. I just wondered if you could flesh out a little bit the scale of potential here in the time that this has been going on your loan to deposit ratio and BNL has been picking up towards 230%. I just wanted to get a favor how much more corporate deposits you fear are too costly and to what extent management is happy to replace that with intergroup funding?

And third question and final question please a bit of a follow-up on the corporate banking business, I felt I think in calls at the end of last year that volumes outstanding in corporate banking may have troughed and there was some optimism that you would begin to see a growing volumes in corporate banking in the first half of this year do you have seen pick down in volume in Q2, I wanted to see if that was related to some of the cautious comments you have been making around energy segments or if there was something broader going on? Thank you.

Lars Machenil

Nick, thank you for your questions and with respect to front retail, I think it’s just a tad too early to have a crisp view on these kind of elements. And we still see that the demand for loans is relatively subdued. I mean I remind you that we are highly segmented towards the corporate, the high network, so that dynamic, you have to monitor that closely and it’s just a tad too early to give them -- to have that as a clear bellwether. So, I will come back, I would need another quarter to basically see how that evolves.

With respect to BNL, so BNL what is happening there is of course a tender balance. So, a tender balance in the sense that in our strategy of course one of the objectives within BNL is to segment it even more than it was segmented as I can sometimes be raving of how wonderfully the retail in France is segmented. And so it is a tender balance at the speed at which we can migrate into the clients that we are after which are the export oriented which can really benefit from all the kind of products that we have so optimize the cross-selling related to that. And so it’s a tender balance of having that commercial relation evolve and the capacity to lower the funding cost within BNL.

And with respect to corporate banking, so as I said on corporate banking, there are three different beats, so you wish so as I said Asia is progressing on trade, it’s progressing on cash management also in North America on the back of the economy. Of course within corporate banking in Europe, as I said the trend, if you look at the subsequent quarter, so if you look at the previous quarter, not four quarters back, as I said the E&C slowdown was basically already visible, so that means if you look at that comparison, you could have some signs of some bottoming out with respect to Europe. But also here I think it’s prudent if we look at it and how it unfolds over the summer and see if Q3 crystallizes on this first signs.

Nick Davey - UBS

Thanks very much. I have a quick follow-up on the French retail business, thanks for the comments on the volume side any comments on Livrea and broader deposit pricing?

Lars Machenil

I think Livrea I mean stood at point of sense its trend is a little bit different I mean if you look at other markets which are non-regulated which basically means that the speeds at which the external rates can be have their ramification weighed in the banking environment the Livrea. Although we are very small on Livrea but of course it beams a bit on other products gives a kind of a slowdown in one trend or an uptick on the other trend. And so of course the trend should be positive, so the trend should be positive. But there is always I mean the speed at which it happens is it that slower than what you have in the non-regulated markets.

Nick Davey - UBS

Very helpful, thank you.

Operator

Thank you. Our next question is from Stefan Stalmann from Autonomous Research. Please go ahead.

Stefan Stalmann - Autonomous Research

Good afternoon Lars, a couple of questions first I wanted to follow-up on the earlier question on BNL you have actually increased your funding gap in the last couple of quarters because of this run-off of corporate deposits. How are you funding that and maybe you could update us on the intergroup funding from Paris has that been increasing in the last couple of quarters? The second question relates to your operations in Switzerland. We have this framework agreement between the U.S. and Switzerland about solving the U.S. cross-border issues. And could you tell us whether BNP Switzerland has categorized itself as one of the banks of on this list and the in which category?

And the final question would relate to KPR, KPR has just announced a relatively big acquisition. Is that something that could trigger a review of your stake your strategic interest in that stake? And also you will be diluted by this stake probably to around 15%. Would that change your accounting of the stake from net equity to maybe investment? Thank you very much.

Lars Machenil

Stefan thank you for your questions. On BNL we stick to the fact that BNL is basically funding itself that’s why as I said to that that means all kinds of means it means to some extent ECB, some extent by placing it in the market and the like. And so that is basically what is happening. I mean our intra-group funding has been gravitating around 5 billion over the last quarter now it has been as you know at higher level in the past but we have been gravitating around that number. It changes a bit a billion here a billion there in a quarter because we may be paid back some LTRO while we’re bringing on steam some other elements and so like. So there is no material pick up with respect to the intra-group funding at BNL it just the basic run of the mill on how they structure their financing.

With respect to your question on Switzerland yes indeed BNP Paribas has filed for a category two and what we think that might be the likely cost associated with that are provisioned so those costs are in the balance sheet. With respect to PPA, the PPA I mean remind you that it’s for us it’s been a very good return on investment. We’ve been changing a bit our shareholder ship at the peered where we wanted to very quickly enter into the Basel III fully-phased environment it is a very good employment of capital. As you know we love industrial plans this is pan-European industrial plan which is folding. So we basically stand by it. So we believe that it is still a good return on our capital. Yes, we will be somewhat diluted but no this doesn’t change the way we account for it.

Operator

Thank you. Our next question is from Bruce Hamilton from Morgan Stanley. Please go ahead.

Bruce Hamilton - Morgan Stanley

Thanks for all the details just a couple of follow-up questions firstly on provisioning obviously you alluded to a couple of areas where provisioning was quite low in the quarter? And there have been a couple of questions on BNL specifically, but as we look forward does what you’ve seen in Q2 in anyway change the guidance you’ve previously given on what sort of group cost of risk might there in next couple of years and if you could just sort of give some sense of where we are relative to the cross cycle kind of average?

And then secondly looking at the markets divisions within the CIB obviously very strong revenue performance, the cost income have slightly drifted up sort of 81%. So again as we think about the move towards the longer term I mean for 70%, should we assume that, that’s more sort ’15, ’16 event given some of the investments going on in that business? And then finally on the wealth and asset management business, the revenues picked up nicely but I see the flows have moved quite negative. Is there anything that changes your outlook in terms of business momentum there and are there any sort of one offs of within the revenues or around performance fees or other or is the improvement in the revenue margin really just the function of sort of business mix? Thank you.

Lars Machenil

And with respect to cost of risk, what I would say is that what we have in the beat is a bit generically the trend. I think some elements of course are particularly low I said Belgium is particularly low. I mean there have been some buybacks or I think at corporate banking, it is also somewhat below what I would call that -- what I wouldn’t call, but below the expected loss, so it’s also somewhat there and so I would make those two remarks with respect to that. And for the rest I think on PF, on Personal Finance, I think it’s a attribute to the overall approach and risk management, so that’s the trend that we really strive for. So that’s on the cost of risk.

With respect to CIB, yea thank you for allowing me to clarify this. So I think first of all you should and when you look to the numbers I mean you should do the calculation taking into account that there is a first time adoption of the FDA I mean that’s one think you should basically look through. Now if you look through that, you will see that the numbers are a tad better than what you mentioned. And of course they are tending towards our objective which is even better than that. But as I said and I reiterate it for the year 2014 and the year 2015, the CIB activities will have what will call intermediary transformation cost. So that basically means that within CIB, in that year 2014 and ’15, the synergies that should basically come to improvement, the cost improvements that are stemming from this simple and efficient will be basically used temporarily to basically get CIB transformed. So what are these, these are things for example when we move in and remember what I said at the investor day, we sometimes move together the back offices in one area of servicing, in one area and so forth.

Now you cannot just do that by switching of the 30th in 1 and starting at the next day in another. So you have dual runs to basically make sure that there is no -- that there is business continuity. So that basically means during that implementation you have dual runned costs and we basically granted them to use the synergies of simple and efficient during 2014 and ’15 in order to have that. So that means that your photo, your picture in 2016 will be as we trended. So in 2016, that cost income should well in one go basically improve. So that is basically along what is behind that.

With respect to investment solutions, you’ve seen the flows on insurance and in security services which have been going well and we’re very pleased with the commercial gains that have been made. And I think what is important to highlight. So with respect to the flows of private wealth management, I think there is one, what I would say a technical qualification that basically impacts that. And so I wouldn’t read too much in it with respect to the commercial activities and the P&L. Of course your point of view is correct in reading with respect to investment solutions, where we keep on monitoring closely the evolvement and the development of our plan which is a plan which is focusing much more investment solutions on its core kind of products and the like.

Operator

Thank you. Our next question is from Alex Koagne from Natixis. Please go ahead.

Alex Koagne - Natixis

A few questions from my side as well. Lars is it possible to have a view on your projection in terms of RW growth in 2014 in light of your guidance of 3% per year, I think that we are a bit low so. I am just wondering whether what are you with for the rest of the year? Secondly, in the retail banking in France, just to comment on the commission, how should we consider the growth going forward for the H2 in light of the regulatory changes? Third question is in corporate banking again, I was just wondering whether you can provide the level of new production over there? And then last question is still on TLTRO, I was just wondering whether you can provide us with the figure of the size of the fund that you can take on the initiative TLTRO? Thank you.

Lars Machenil

Alex, with respect to the risk weighted asset growth, so indeed what we have guided is the overall trend and what we have also guided at the Investor Day that there will be different phases in the investment plan. So, the first year 2014 will be more kind of the build period after which growth should accelerate. So, you would already assume that your normal run of the mill would be slower than, this year than the overall guidance and that is basically what you have seen the RWAs are relatively stable. But nevertheless, do not forget that we have announced some acquisitions which will of course impact that and so I remind you LaSer and BGZ. So the RWA growth will, this year, more likely stem from the acquisitions than from the bulk of the growth.

And with respect to the commissions in France, while we do not have given any specific guidance, so for all of you on the call this thing started on January 1st and we expect it to be somewhere around 50 million of impact on the full year. And with respect to corporate banking on new production, well I don’t know if new production is, well, there is more than new production but overall we believe we observed that in corporate banking there is rather a good level of production. But as I said you also have to look at the repayments and so on and so forth before we can really see that this is a trend picking up, so I would still be cautious on that one.

On the TLTRO, I think it is too early to say, I mean we have to really look into what the opportunities are for us because the TLTRO although it’s called targeted LTRO, I think it’s more a conditional kind of TLTRO, so we have to see what is kind of the amount that we can redeploy. Also one has to see that this of course is at first sight limited in time, so you can probably, you don’t want to go to massive structural amounts, if you don’t want to run any issues later on. So, we are basically looking at it and once we have set the cursor we will relay back to you.

Operator

Thank you. Our next question is from Jean-Francois Neuez from Goldman Sachs. Please go ahead sir.

Jean-Francois Neuez - Goldman Sachs

Good afternoon and just two quick questions please. The first one on LaSer, do you have guidance for the capital impact, I supposed the price which was rumored or low I supposed various restriction on that, was fairly low, so I would have assumed that the capital impact was also de minimis in case you can confirm? And the second question is on the balance sheet structure, so since the funding squeeze of 2011, in three years, your funding gap has gone from about 120 odd billion to about 50 now yet you continue to issue very significant amounts of wholesale funding every year and mostly unsecured whilst the big balances in your balance sheet seems to match a lot better than they used to. And that I supposed reflected also in very big amount of liquidity buffers which are typically higher when wholesale funding is higher. What I want to understand is, why the volumes of wholesale funding continue to be so high and may be at what level of deposits you will be happy to reduce the level of wholesale funding issuance every year and reduce the amount of liquidity buffers as a result of that suppose -- which is weighing on your earnings and on your leverage as well? Thank you.

Lars Machenil

Jean-Francois thank you for your questions, with respect to LaSer if de minimis is let’s say a single-digit number or maybe high single-digit number then I confirm your statement. And with respect to the wholesale funding, of course the wholesale funding is not something that you can easily change from year-to-year you cannot put it at zero one year and put it at level of 100 billion at another year it’s like this and so it’s something that you have to work on at a very let’s say slowing moving pace.

And the reason why we are at the level at where we are is amongst others because of course our intention is to face again a pickup in growth. So that basically means as you saw in our plan or risk-weighted assets will grow so risk weighted assets around that side of the balance sheet. And so we believe that there can be higher degree of redeployment of the liquidity that we have attracted. So, that is basically that. And we accepted that that’s why we said that a part of that cost for the moment and we keep it at corporate center and part of that should overtime flow back into the business.

And just to give you the idea of what the reflections are in today one could say that the TLTRO is basically coming in and stepping up. Now imagine that you would replace your long-term funding by the TLTRO and then in two years or four years time basically this thing basically stops because the Europe is flying and everything is fine. I mean stepping up again that speed is complicated. So the wholesale funding is not something which you in a very fecal way stop and start. Given the uncertainty still with respect to some of the liquidity benchmarks NSFR and the likes, given the fact that we anticipate that on the asset side we will grow. Given the fact that we do not have a clear view on what eventually structural continuation of things like the TLTRO would be. At this stage we remain prudent and we remain roughly in the waters of what we had in the past. Although that amount of course has come somewhat down. So maybe a long answer but it’s a topic with many moving parts.

Jean-Francois Neuez - Goldman Sachs

So, just if you allow me to follow up very, very quickly, that means that if let’s say because now your loans are not moving much but let’s say that next year you have 3%-4% loan growth you could see now whereby you don’t do more issuance even if you loan growth pick up which would then in turn mean that your top-line would fully benefit eventually from the new issuance without necessarily have the parallel effect in your net interest expense? Is that a fair way to say it?

Lars Machenil

As I said it depends on several factors it depends on as I said the NSFR and things like that one of that. If everything would be similar as we said we do have a buffer of liquidity that at one point in time could indeed be redeployed. But I would be I personally remain cautious as long as all the moving parts have not been clarified and I would remain prudent on this. But intrinsically there could be an improvement on the redeployment of that liquidity.

Operator

Thank you. Our next question is from Flora Benhakoun from Deutsche Bank. Please go ahead.

Flora Benhakoun - Deutsche Bank

Good afternoon. I’ve got two questions for you please, so the first question is on the cost of risk which was obviously a positive surprise this quarter so better than expected. You have made some comments in the slide pack on some of the re-gens having particularly low provisions this quarter. But you don’t do such comments for Europe, Mediterranean and for personal financing despite the decline in the cost of risk. So the first question would be actually whether you could give us any kind of guidance on whether the lower level of provisions we’ve seen this quarter in both distribution is going to sustainable?

And the second question is whether you could make any kind of comment on the potential loss of clients that you may have witnessed as a consequence of the U.S. litigation case. At the group level in general and obviously maybe some more impact you get on the corporate banking business. So obviously you have good results in corporate banking revenues this quarter more expectations. But let’s say the press coverage on the U.S. litigation case was at the end of the quarter. So any qualitative comment that you could make on the potential impact on your client base would be welcomed? Thank you.

Lars Machenil

Flora, thank you for your questions and as you know we’re not a bank which is giving forward-looking guidance but what I can say is that with respect to peers is that the way we approach, the way of doing business is of course one where which generates an environments like this lower cost of risk. But that’s basically all I can provide color with. With respect to Europe-Mediterranean it’s the same thing. If you look at where we stand, we see that and we published this. So you can see that on Page 45. You see that things are hovering around an amount which has a somewhat downward trend for example in Turkey but nevertheless, UkrSibbank in Ukraine is part of that. So one has to remain prudent even though that for UkrSibbank, we have taken for Eastern Europe in general, we have taken a collective provision. And so I think I would remain prudent with respect to that evolution.

With respect to your question on client, there is two things I would like to mention. The first one is that arguably the whole month of June, the elements of the settlement were in the press, I don’t exactly where you were in June but where I was I had everything very many details that people were aware of by reading the newspapers. Nevertheless, we have seen that, the second quarter results have been solid. Moreover, the day after the June 30th, announcement we’ve been and maybe if I indeed if I can quantify or refer to what we said, and this is really on the back of our strong commercial performance if you look at corporate banking because that one of your questions. We’ve been number one again in both syndicated and basically corporate. And so that is kind of a reflection of that.

And as I said, adjacent to that immediately following the June 30th announcement, we have done a massive reach out to the clients, to basically well as I said, to basically relay the story. In terms of regret that we have for what had happened that we reached however comprehensive settlement and that we put in motion things for it never to happen again. And what we basically saw for our clients is that they respected that and they confirmed their confidence with us given the industrial approach to all that. And I think you can see that I have spoken about the rankings but I’ve mentioned the Generali deal which is a material deal and the likes saw, I think the first indications are that given the solidity of the bank, a 10% core equity tier 1 it’s ample liquidity and the confidence that is really backed by the clients. And as I said, we regret what has happened, but it should allow us to move forward.

Operator

Thank you. Our next question is from Anke Reingen from RBC. Please go ahead.

Anke Reingen - RBC Capital Markets

I have three follow-up questions please. The first is coming back to litigation operation risk weighted assets and I was wondering a number of peers they obviously incorporated some forward-looking element in their operation of risk weighted assets for litigation. If you think that’s potentially a risk for you as well or something you are considering taking up to be a taking a bit more prudent approach. Then secondly coming back on capital management, at the investor day, you had obviously the combination of 45% payout ratio, 3% growth on risk weighted assets and 30% of earnings as qualifying as free cash flow. And you already confirmed the 45% payout ratio but I just wondered about the 4% -- 3% on average both on risk weighted assets. If that still stands and what’s your view is on additional capital flexibility taking the risk weighted asset growth from the dividend payment into account? And lastly just on the CIB costs are you willing to share with us what the dual run costs are in order to get more confidence on the 2016 cost income ratio for CIB? Thank you.

Lars Machenil

Anke, thank you for your questions, so with respect to the operational risk, so indeed what the way it works is that in our models for example the kind of issue that we settled was in all kind of models. We updated it with respect to what we have, so there are many elements in there to cover and we basically updated it with the elements which we observed in the supplement, so that’s basically where we stand on that one. And with respect to the capital management, you are referring me to the slide that we have shown on the Investor Day which basically said that there are indeed three kind of destinations. We said that with respect to the free cash flow part of the definition. We basically said that it would be used by one of the following.

It would be used to face regulatory uncertainty, it would be used to cover better than anticipated growth or that it would be used for bolt-on, bolt-off and/or share buyback kind of stuff. So, all this remains correct, so as I said this year it’s peculiar because we fixed the dividend at 1.5. The objective is to go back to basically what we said into the slide, a part of that free cash flow which was accumulated has been basically used for that first category. And basically going forward we will, as I said, operate by what we said and return to 45% dividend cover the growth and so have some free cash flow generated.

Anke Reingen - RBC Capital Markets

And the 3% still as well along 2016 or you are…?

Lars Machenil

As I said this is what we had in our plan which was, I will remind you, so we had a central scenario which basically had the limited growth in Eurozone in the first year and then picking up and based on that we came to a CAGR of 3%. And I am not updating each of these numbers every two weeks, it’s maybe every month that I do that, this was a joke sorry. So, I mean our trend remains that, I mean may be a year into the plan, we might tell you some updates but today we basically see the big aggregates of our plan and we will confirm that. And with respect to those interim adaptation costs on Page 57 of our presentation, you see that we have identified them in the first half year of standing at €25 million. And so this is basically the thing that I said, it’s the startup of new back-offices, IT systems and new regulations.

Operator

Thank you. Our next question is from Cyril Meilland from Kepler Cheuvreux. Please go ahead.

Cyril Meilland - Kepler Cheuvreux

Good afternoon. I have three quick small questions. First one is about the corporate deposits, you mentioned that they are up 16% year-on-year they are actually flat quarter-on-quarter. Is there anything that is so much related to the U.S. problems or is it just kind of seasonal? The second question is regarding the liquidity buffer, you took it down quarter-on-quarter. Is this the new trend, are you managing this buffer a bit more aggressively or again is it just cyclical? And the last question is regarding the asset quality of BNL can you provide us with some NPL ratio evolution and coverage ratio evolutions again quarter-on-quarter just for us to get an idea about what is on top of the evolution of allowance ratio, what’s going on at BNL? Thank you.

Lars Machenil

Cyril, thank you for your questions, on the corporate deposit, there is nothing particular to mention, so this is just part, as I said of the overall kind of evolution that we have, nothing particular to mention. And with respect to your liquidity buffer, just to understand I take it that you referred to the 244 billion of readily available cash which basically stands roughly at the same level where it stood at the year-end. But it is true that it is somewhat down versus where we stood at Q1. And let me reiterate again it depends on what you guys see but for me 240 billion whatever above 200 billion is what we call in our presentations, ample liquidity. And so at some point I mean we can -- the objective cannot be to just stack up on liquidity.

If you compare this buffer towards or compare it with our short-term kind of funding and you just relate it to tiny you see that that this represents more than one year of our short-term wholesale funding. And so I guess this is more a reflection of optimization than anything else. And with respect to the asset quality on BNL, so as we basically aligned all our reportings on the group we give the group reporting we do not basically break it down. Nevertheless, what you do see is that the coverage ratio in Italy has somewhat improved over the quarter. And the increase of impaired so the NPL has somewhat slowed down. But again I would remain very prudent and I would suggest that we look back in the third quarter when we see each other again end of October to see how well this evolves.

Operator

Our next question is from Maxence Le Gouvello from Credit Suisse. Please go ahead.

Maxence Le Gouvello - Credit Suisse

Good afternoon Lars. Most of my questions have been asked already, just to point on the RWS your growth on the Q2 results. If I am stripping out the operational risk part that’s mean the underlying risk underlying RWS for the businesses are flat. Is it right? And also so one question regarding the U.S. settlements and feeling guilty. Where are you in the process of renegotiating your banking and asset management license? Thanks.

Lars Machenil

Thanks Maxence, yes you are absolutely right. And so the one thing which moved up the RW this quarter is that evolution operational risk and basically bar that the risk weighted assets are flat. With respect to the U.S. settlement, so the U.S. settlement basically came also with the configuration of the licenses. We basically just as we reached out to all of our clients we reached out to the regulators which basically confirmed the licenses less than right and there are some processes administratively that take some more time. As an example is the one is the waiver with respect to the sec which we received last week, end of last week. And so basically with that we are on-track to as I said to continue to serve our clients.

Maxence Le Gouvello - Credit Suisse

You are not like some other Swiss banks which are waiting for some reinsurance regarding some ability to sell some asset management product in the U.S.?

Lars Machenil

No, as I said, there are several aspects. I mean there are some administrative which takes kind of weeks and I think the waiver at the sec is one of them. And then you have some which have to do really with the quite some administrative aspect which do take well more than weeks but do take months. And these kinds are applicable that just the time you have to go through. You might have some Swiss bank that in mind to have to do this but that is the same for this bank or any bank actually.

Maxence Le Gouvello - Credit Suisse

And you expect to finish all those processed by at the end of the year or even Q3?

Lars Machenil

No, I think the big majority has done I think in the U.S. that’s the only one which is being done all the other ones are basically lock stock in barrel so this is not an issue.

Operator

Thank you. We have a question from Omar Saad from Jefferies. Please go ahead.

Omar Saad - Jefferies

I just like to come back to the CIB business with just two questions please. Firstly, on corporate banking and the 3% year-on-year rise and the fact you highlight the strong growth in trade finance in Asia. That seems surprising relative to Asian peers who have all seen negative revenue growth in that period for that business. And then more broadly volumes in corporate banking are down 8% and then industry seeing margin pressures. So can you just elaborate on exactly what happened there I wouldn’t have thought cash management was big enough to offset both the volume and margin decline in beyond balance sheet part of the business?

Secondly, going back to the fantastic top-line performance in the markets business and this is the first quarter in many that BNP has materially outperformed peers, that is reported so far and by coincidence it occurs in the quarter that includes the settlement with U.S. authorities. If I look at the balance sheet, I see that trading assets have increased as well and you highlighted the end of the deleveraging. Is it too cynical of me to think that you have pushed the balance sheet somewhat in re-risked this quarter in the markets business to achieve these numbers as it shows strength in the face of the fine? Thank you.

Lars Machenil

Omar, thank you for your question, now with respect to Asia, well I cannot comment of course on competitors. I’ll just remind you that I mean of what your approach is. I mean we are not a pure play retail player and maybe you don’t compare us with them but some do. So that environment is different and what we basically do is leverage on our products and our services and that we basically have follow our clients into that region and basically develop emerging global players and regional players in that area and that is basically what we do. And if you look at the strength of the products that we have and the capabilities that we offer, with respect to cash management, the trade finance but also fixed income and equity and advisory, I think this puts us in a position to serve our clients well to do quite some cross-selling between the CIB and the IS and particularly wealth management kind of activities and that is basically driving this growth. So it’s basically in line with what we see and so we have a good blend of net interest income and fees related to that mix of activities. So that is on Asia.

With respect on markets, can I answer cynically on a cynical question? I mean if we really would have wanted to have some increase in numbers, would I have taken a 200 million cost provision on remediation and would I have done other things that you see which are basically weighing on the results, I don’t think so. I think as I said I mean for us the deleveraging is done. I mean I said it several times, I mean we’ve all had, the majority of us have all witnessed this, a kid falls, you put a band aid on and then you have to rip it off. And then typically some rip it off slowly which is a long thing and it hurts a little bit but in a very long way and we have taken the option to rip it off very fast, which basically means that we are ready, that basically means we can follow our clients, it basically means that we can put our balance sheet to use for the client that is basically what we have done and you basically see that into the rankings of where we stand on each of those activities.

Omar Saad - Jefferies

Can I just follow up with very small question? I am sorry if I missed this but what is the amount of grandfathered eligible instruments included within the 3.5% leverage ratio?

Lars Machenil

It is €8 billion.

Omar Saad - Jefferies

€8 billion.

Operator

Thank you. We have no other questions for the moment.

Lars Machenil

Okay. So I basically thank you all for listening in this quarterly results which I think have shown our significant impact in the quarter, our major changes to the Group’s internal control, good performance of operating divisions, net income excluding exceptional items of 1.9 and my all time favorite rock solid balance sheet. I thank you very much and I wish you a very good day.

Operator

Thank you. Ladies and gentlemen, this concludes the call of BNP Paribas’ second quarter 2014 results. Thank you for participating. You may now disconnect.

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Source: BNP Paribas (BNPZY) Q2 2014 Results - Earnings Call Transcript

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